Legal Issues Affecting Innovative Fintech Companies

Fintech Week in Review, February 5th – 16th, 2018

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

CFTC Chairman Gives Testimony Before the U.S. Senate Agriculture, Nutrition, and Forestry CommitteeOn February 15, 2018 Chairman J. Christopher Giancarlo of the Commodity Futures Trading Commission (CFTC) provided testimony related to the CFTC’s plans to regulate virtual currencies and how this new technology impacts the agricultural markets before the United States Senate Agriculture, Nutrition, and Forestry Committee. Chairman Giancarlo encouraged Senate members to adopt a federal regulatory scheme and stated “a rationalized federal framework may be more effective and efficient in ensuring the integrity of the underlying market.” 02.15.2018_Written Testimony of CFTC Chairman Giancarlo

SEC Office of Compliance Announces 2018 Examination PrioritiesOn February 7, 2018 the SEC announced its 2018 examination priorities, which are typically published annually to help improve compliance, prevent fraud, monitor risk, and inform policy. The announcement notes “Of particular interest this year will be matters involving critical market infrastructures, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.” 02.07.2018_SEC Press Release. For more information and details, seehttps://www.assetmanagementadvocate.com

SEC Suspends Trading in Three Issuers Claiming Involvement in Cryptocurrency and Blockchain TechnologyOn February 16, 2018 the SEC announced that, pursuant to Section 12(k) of the Securities Exchange Act of 1934, it was suspending trading in “three companies amid questions surrounding similar statements they made about the acquisition of cryptocurrency and blockchain technology-related assets.” The SEC’s trading suspension orders claim that recent press releases issued by Cherubim Interests Inc. (CHIT), PDX Partners Inc. (PDXP), and Victura Construction Group Inc. (VICT) claimed that these companies acquired “AAA-rated assets from a subsidiary of a private equity investor in cryptocurrency and blockchain technology among other things.” The orders raise questions regarding “the nature of the companies’ business operations and the value of their assets.” Under this suspension of trading authority, the SEC has suspended trading in the securities of these companies until March 2, 2018. 02.16.2018_SEC Press Release; Order of Suspension_Cherubim Interests, Inc.;Order of Suspension_PDX Partners Inc.; Order of Suspension_Victura Construction Group, Inc.

Wyoming Legislators Welcome Blockchain Technology with Several New Bills Introduced this SessionThis legislative session, four bills have already been introduced in Wyoming focused on seeking economic development through various technologies and making it easier to invest in blockchain and cryptocurrencies in the state.

HB0070 – creates an exemption to initial coin offerings (ICO) tokens issued on an open blockchain from Wyoming’s money transmitter and securities laws, as long as (1) the token has not been marketed as an investment, (2) the token is exchangeable for goods and services, and (3) the developer of the token has not entered into a repurchase agreement of any kind or entered into an agreement to locate a buyer for the token. If passed, this bill would also exempt token exchanges from being deemed broker/dealers under Wyoming law.

HB0101 – focuses on making it easier for autonomous vehicle and Internet of Things (IoT) companies to easily file LLCs in the state.

Florida Judge Refuses to Freeze Assets in Case Involving Digital Currency Company, BitConnectIn early February, a federal judge in Florida denied the plaintiffs’ request for a Temporary Restraining Order (TRO) that would “freez[e] the Defendants’ assets and requir[e] Defendants to disclose their cryptocurrency wallet addresses,” without Defendants receiving notice and an opportunity to respond in an action filed surrounding the recent collapse of cryptocurrency enterprise, BitConnect. Wildes et al. v. Bitconnect International PLC et al., Case No. 9:17-cv-80086-Middlebrooks; see alsoLaw360 article. By contrast, a Kentucky court recently landed the other way in a recent similar suit. In the Kentucky matter, the court issued a TRO last month and granted an asset freeze through February 27, 2018 in favor of a different group of plaintiffs who claimed that several BitConnect entities and a promoter violated various state and federal securities laws. The Court granted the TRO request, reasoning that the “entry of a [TRO] is in the public interest because the public is interested in preventing massive consumer fraud and other securities violations described in the Class Action Compliant,” and that the request for TRO could be granted without notice “to preserve the status quo and prevent irreparable harm until such time as the Court may hold a hearing.” Paige v. Bitconnect et al., No. 3:18-CV-58-JHM (Class Action Complaint); Paige v. Bitconnect et al., No. 3:18-CV-58-JHM (Order Granting TRO); see also Law360 Article “Cryptocurrency Outlet Accused of Fraud in 2nd Investor Suit”

Texas Regulators File More Enforcement Actions Against Cryptocurrency CompaniesThis month, the Texas State Securities Board (TSSB or the Texas Board) has filed the third and fourth civil enforcement actions of 2018 against companies involved in cryptocurrency businesses. On February 2, 2018 the TSSB filed an Emergency Cease and Desist Order (Order No. ENF-18-CDO-1757) against DavorCoin. The Order concludes that the DavorCoin Lending Progam investments are “securities” as defined by Section 4.A of the Texas Securities Act as well as making a series of other violations of the Texas Securities Act. The Order requires DavorCoin to immediately cease and desist from offering the sale of any security in Texas. Then, on February 15, 2018 the TSSB filed an Agreed Cease and Desist Order (Order No. ENF-18-CDO-1759) in the matter of Investors of Crypto LLC and Daniel Neves (collectively Respondents). The Texas Board found that Respondents had been offering and advertising investments in cryptocurrency investment programs (including investment pools) to unaccredited investors. The Order requires Respondents to immediately Cease and Desist from offering for sale and selling any security in Texas until the security is registered with the Securities Commissioner or is offered for sale pursuant to an exemption and to immediately Cease and Desist from acting as a securities dealer in Texas until Respondents are registered with the Securities Commissioner or are acting under an exemption. Respondent Neves, personally and on behalf of Crypto LLC, knowingly and voluntarily consented to the entry of the Order.

International Developments

South Africa’s Central Bank Announces Plans to Develop Ethereum-Based Blockchain PoCThe South African Reserve Bank (SARB), the Central Bank in that country, announced its new project designed “to replicate interbank clearing and settlements” on an Ethereum-based blockchain. The project is based on proof-of-concept (PoC) model. Through this project, the Central Bank has expressed its intention to gain a practical understanding of distributed ledger technologies within the banking industry. The project represents a “structured approach to understand the implication of using a tokenized asset on DLT technology to transfer value” and is not anticipated to replace the country’s national payments infrastructure. This PoC project is just one in a series of steps the SARB intends to take in order to explore developing Fintech within the country. 02.13.2018 Press Release